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Changes to Flex Spending Accounts Could Hurt Consumers

By Jenifer Goodwin
HealthDay Reporter

WEDNESDAY, Dec. 8 (HealthDay News) -- It's the time of year for holiday parties, gift shopping and open enrollment, when many employees have to make decisions about their employer-sponsored health-care plans.

Last year's landmark health care reform legislation means changes are in store for 2011. One of the most significant: starting Jan. 1, you'll no longer be able to pay for most over-the-counter medications using a flexible spending account (FSA).

That means if you're used to paying for your allergy or heartburn medication using pre-tax dollars, you're out of luck unless your doctor writes you a prescription. (The exception is insulin, which you can still pay for using an FSA even without a prescription).

Flexible spending accounts, which are offered by some employers, enable employees to set aside money each month to pay for out-of-pocket medical costs such as co-pays and deductibles using pre-tax dollars.

"This is basically reverting back to the way FSAs were used a few years ago," said Paul Fronstin, a senior research associate at the Employee Benefit Research Institute in Washington, D.C. "It wasn't that long ago that you couldn't use FSAs for over-the-counter medicine."

Popular uses for FSAs include eyeglasses, dental and orthodontic work, as well as co-pays for prescription drugs, doctor visits and other procedures, explained Richard Jensen, lead research scientist in the department of health policy at George Washington University in Washington, D.C. Over-the-counter drugs became FSA "qualified medical expenses" in 2003, according to the Internal Revenue Service.

The way an FSA works is an employee decides before Jan. 1 (usually during the company's open enrollment period) how much money to contribute in the year ahead. The employer deducts equal installments from each paycheck throughout the year, although the total amount must be available at all times during the year.

Typically, FSAs operate under the "use it or lose it" rule. You have to spend all of the money placed in an FSA by the end of the calendar year or the money is forfeited, Jensen explained.

Since generally speaking, the cost of over-the-counter medications pales in comparison to the cost of co-pays and deductibles, the 2011 change shouldn't be too onerous for consumers, Jensen said. An analysis by Aon Hewitt, a human resources consultancy firm, found that only about 7 percent of all FSA claims in 2009 were for over-the-counter drugs, and just 3 percent of FSA expenditures went to buying these products.

The reason for doing away with the tax break is to help pay for other goals of the health-care reform legislation, including making sure that more Americans are able to get health insurance, and that the insurance they get has more comprehensive coverage, Jensen said.

"If you take as a given that the point of health care reform is to cover as many people as possible, it's an equitable approach," Jensen said. "The tax break is regressive, meaning mainly middle- and upper-income people were benefiting from it."

One criticism, however, is there's the potential for people to head to the doctor asking for prescriptions for drugs they used to buy without one, a costly move, he added.

And an even bigger change is coming in 2013, when health reform law will cap the amount that can be set aside in an FSA at $2,500 a year. Beyond 2013, the limit will be indexed to changes in the consumer price index.

While the law currently sets no limit on how much an individual can put in an FSA each year, many employers already set their own cap at $5,000.

The people who will feel the pinch then are those with chronic health conditions who have lots of out-of-pocket costs, Jensen said.

The Hewitt Associates report, which looked at 220 U.S. employers covering more than 6 million employees, found that only 20 percent of eligible employees contributed to an FSA in 2010.

Of employees who contribute to an FSA, the average annual contribution is $1,441 and the annual savings is between $250 and $640 each year in federal taxes.

Only 18 percent of workers contributed more than $2,500 a year, the maximum in 2013, and they tended to be high-income people earning more than $150,000 a year.

The employee portion of insurance premiums are not payable through FSAs. Some employers, however, set up plans in a way that enables employees to pay premiums as well in pre-tax dollars, Fronstin said.

More information

The IRS has more on the new rule.

SOURCES: Richard Jensen, M.P.H., lead research scientist, department of health policy, George Washington University, Washington, D.C.; Paul Fronstin, Ph.D., senior research associate, Employee Benefit Research Institute, Washington, D.C.

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